Morgan Stanley reported more good news regarding the credit quality in CMBS last week, noting that over the past month, the three major ratings agencies upgraded a total of 59 CMBS classes and had no downgrades. They further noted that upgrades to downgrades now exceed 12:1 for the year.
Why is the commercial real estate sector doing better than corporates? Morgan Stanley suggests one reason is that the current downturn has been relatively mild in terms of delinquencies and losses. Another reason, they say, is supplied by a Fitch study that will be released shortly which shows that many delinquent commercial mortgages in CMBS have become current or paid off in full. Furthermore, for those loans going through foreclosure and liquidation, the average loss was only about 20% of the remaining balance.
Following the tremendous supply in July that contributed to some spread widening, the market has snapped back from S+50 basis points, adds Credit Suisse First Boston. They believe that this level has become a critical psychological threshold for investor interest in triple-A 10-year paper. In addition, they suggest that spread movements are becoming more rapid.
Looking ahead, most analysts on the Street expect CMBS spreads to continue to tighten, even possibly through the tights hit in the second quarter. So far in August, three deals have priced totaling $3.1 billion. These included: an $820 million single-borrower, LBUBS 2001-WM, via Lehman Brothers and UBS Warburg; a $1.5 billion large-loan floater, LB 2001-LLFC4, via LB and UBS; and an $819 million conduit, FU 2001-C3 via First Union and Deutsche Banc Alex. Brown.
Four more issues are in various stages of marketing and pricing: a $1.2 billion conduit, CSFB 2001-CP4, via CSFB; a $563 million single-borrower, GMAC 2001- WTC, via Goldman Sachs and DBAB, with the $289 million A2 class pricing last week at +37 basis points over Libor, three basis points better than talk; a $277 million single-borrower, CSFB 2001-SPG-1, via CSFB; and a $710 million large-loan offering, GSMS 2001-GL3, via Goldman. The addition of these issues would bring August issuance to $5.9 billion, modestly higher than the $4 billion in fixed and floating originally expected.